The Personal Property Securities Act 2009 - A new start for securing interests in personal property

Posted on: 22 Dec, 2010 |
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Introduction

Commonwealth and state based systems for registering security
interests in personal property have for a long time been less than
satisfactory.

The need to register a security interest and the process for
doing so has been determined by many factors including the identity
of the personal property (eg motor vehicle, equipment or
agricultural crops), the type of security taken (eg bill of sale,
charge or pledge) and the jurisdiction in which the security was to
be taken.

Compounding these problems was the existence of a plethora of
Acts and Registers dealing with the taking of security interests in
personal property.

The Personal Property Securities Act 2009
(PPSA), designed to be a national 'umbrella' Act
concerning the taking of security over personal property, will
effect a revolutionary change to the way customers,
manufacturers and suppliers, banks and financiers and insolvency
practitioners 'do business'. Who owns the 'title' to personal
property will no longer be relevant.

The PPSA contemplates the movement of personal property across
borders and provides various rules for dealing with that
contingency.

The PPSA is scheduled to start in early
2012. The consequences of failing to understand the
changes that the PPSA will bring and be prepared for its
commencement will be dramatic.

What is Personal Property?

Personal property includes any property other than land, certain
rights and entitlements granted by law or as specifically excluded
by the PPSA.

This means that tangible and intangible property will be
'personal property' under the PPSA. Examples include motor
vehicles, ships, aircraft, equipment, intellectual property,
licences and book debts.

What is a Security Interest in Personal Property?

A security interest is an 'interest…in personal
property…that, in substance, secures payment or performance of an
obligation (without regard to the form of the transaction or the
identity of the person who has title to the property)'.

Examples of a personal property security include a fixed and
floating charge, a hire purchase agreement, a lease of goods, a
chattel mortgage and a flawed asset arrangement. The PPSA also
includes transfers of account or chattel paper, commercial
consignments and the interest of a lessor or bailee under a PPS
lease as a security interest.

Retention of title arrangements and the factoring of book debts
will be security interests under the PPSA and will need to be
'protected' as required by the PPSA if they are to remain legally
effective.

Understanding PPSA Terminology

The PPSA introduces new terminology and concepts, some of which
are self evident and some of which are not:

Grantor: the person who owns or has an interest
in the personal property and who gave or granted the security
interest

Secured Party: the person who holds the
security interest

Security Agreement: a written agreement in the
terms required by the PPSA by which a security interest is
created

Collateral: the personal property to which a
security interest is attached

Attachment: the step by which a security
interest attaches to collateral on the giving of value for the
security interest or on the grantor doing an act by which the
security interest arises

Perfection: refers to the process required to
ensure the security interest is enforceable against third parties
and in an insolvency situation; perfection is determined by
specific rules about when a security holder has either
possession (in the case of tangible items) or
control (of intangible items)

Purchase Money Security Interest (PMSI): known
as a 'super priority', this refers to a security interest taken in
collateral to the extent that it secures all or part of
the purchase price or value given to acquire rights in the
collateral

Fixed and Floating Charges

The use of the term 'fixed and floating charge' should disappear
in time. The PPSA defines personal property subject to a fixed
charge as a 'circulating asset' and personal property subject to a
floating charge as a 'non circulating asset'. A fixed and floating
charge will become known as a (general or specific) security
agreement.

The provisions of the Corporations Act 2001 that deal
with the validity and enforceability of a fixed and floating charge
created within certain time periods prior to insolvency will be
amended, as will a number of other insolvency provisions of the Act
that will affect creditors. Employee entitlements in the
liquidation of a grantor will retain priority over a floating
charge where there is a deficiency.

Accessions, Processed and Commingled Goods

Goods that are installed in or affixed to other goods or which
are manufactured, processed, assembled or commingled and as a
result lose their identity in the product or mass, present unique
problems. The PPSA provides rules to determine the existence and
priority of the security interests in such items.

The PPS Register

The PPSA creates a new register known as the PPS Register. This
will be the only register for the recording of security interests
in personal property. Certain existing registers, such as the ASIC
Register of Charges, will be 'migrated' to the PPS Register and
form part of it.

The PPS Register will operate 24/7, 365 days a year and be
accessible to everyone. Entries and amendments to entries on the
Register will be made by a 'financing statement' and a 'financing
change statement'. Entries into the Register will need to be
correct and comply with the PPSA Regulations to avoid any risk that
an entry is rendered 'defective'. The Register will confirm entries
by issuing a verification statement to the lodging party. Fees and
charges will apply for searching the register and for posting
entries on the Register.

Protecting Your Security Interest

To be truly effective, a security interest must be effective
against the competing claims of third parties or creditors in an
insolvency situation.

To achieve that position, the holder of a security interest must
have a security agreement and must perfect that interest.
This can only be achieved by registering the security
interest on the PPS Register or by having possession or
control of the collateral, as those terms are
defined in the PPSA.

A security interest perfected by control can take
priority over a security interest perfected by registration; this
is an exception to the 'principal rule' that perfection is best
achieved by registration.

Priority Rules

The PPSA provides general and specific rules to determine the
priority between competing interests.

where all security interests are perfected by registration, the
first to be registered has priority; and

where all security interests are unperfected, the first to
achieve attachment has priority.

Parties will be able to change the order of priority by entering
into subordination agreements.

Enforcement

The PPSA provides a prescriptive regime regarding the
enforcement of a security interest when a grantor defaults. The
regime only applies to personal property located in Australia. The
PPSA permits 'contracting out' of the enforcement regime where the
personal property is not used predominantly for personal,
domestic or household purposes.

Where the Consumer Credit Code also applies to the personal
property, compliance with the enforcement provisions of either the
Code or the PPSA will be sufficient.

Transition

The PPSA provides various transitional rules, the most
significant of which is to allow a 24 month window for security
interests that did not previously require registration, to become
registered within that time, in order not to lose their existing
'priority'.

Note

This Information Sheet is a general guide only and is not
to be used as a substitute for considered legal advice on
particular facts and circumstances.